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Natural Gas Faces Harvey Threat, Even as Surplus Shrinks

The U.S. Energy Department's weekly inventory release showed a below-average increase in natural gas supplies following which the commodity traded up. However, worries over the fuel’s tepid demand on the back of Tropical Storm Harvey-related power outages are expected to keep natural gas prices in check.

The report provides an overview of the level of reserves and their movements, thereby helping investors understand the demand/supply dynamics of natural gas. It is an indicator of current gas prices and volatility that affect businesses of natural gas-weighted companies and related support plays.

Analysis of the Data: Below Average Rise in Storage

Stockpiles held in underground storage in the lower 48 states rose by 30 billion cubic feet (Bcf) for the week ended Aug 25, 2017, slightly above the guidance (of 29 Bcf gain) as per the analysts surveyed by S&P Global Platts, a leading independent commodities and energy data provider.

However, the increase was lower than both last year’s addition of 46 Bcf and the 5-year (2012-2016) average net injection of 67 Bcf for the reported week. This caused the current storage level – at 3.155 trillion cubic feet (Tcf) – narrow its surplus to the five-year average to just 8 Bcf (0.3%), while stocks have now fallen 239 Bcf (7%) below the year-ago figure.

Fundamentally speaking, supply fell 1.9% on a weekly basis to 77.2 Bcf per day, while daily natural gas consumption declined 10.4% to 67.4 Bcf. The steep decrease in demand was triggered by sharply lower power burn. Meanwhile, Mexican gas exports were down some 11.4% as Hurricane Harvey hampered pipeline shipments.

Prices to Suffer Temporarily from Harvey Impact

Despite yesterday’s rise in natural gas prices, the aftermath of Hurricane Harvey is expected to weigh on the commodity in the near-to-medium term due to the following reasons.

Depressed power and manufacturing sector demands due to temporary electricity outages for the next several days. The big storm has also brought cool temperatures to the region, limiting air conditioning demand.

Despite occasional hiccups, the natural gas demand situation looks promising with warmer-than-average conditions set to prevail in most U.S. pockets over the next few days and power generators burning more gas to meet intensifying cooling demand. However, there are apprehensions that the peak summer demand will begin to recede within the next few weeks.

In any case, long-term fundamentals for the commodity continue to be supportive on the back of structural imbalances. While domestic natural gas production is expected to rebound this year, the growing use of liquefied natural gas (or LNG), booming LNG and Mexican exports, replacing coal-fired power plants and higher demand from industrial projects will likely take care of the increased output.

The resulting effect will ensure natural gas storage keeping pace with the five-year average in the near future, with deficits piling up later on. Over time, these secular tailwinds are likely to support natural gas sentiment and price.

Headquartered in Fort Worth, TX, Range Resources is an independent oil and gas company, engaged in the exploration, development and acquisition of oil and gas properties primarily in the southwestern, Appalachian and Gulf Coast regions of the U.S. The 2017 Zacks Consensus Estimate for this company is 48 cents, representing some 1,487.2% earnings per share growth over 2016. Next year’s average forecast is 64 cents, pointing to another 34.6% growth.

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